Posts Tagged ‘Tony Alexander’

Thanks again to Tony Alexander (currently suffering from pneumonia, get well soon Tony) from the BNZ for his insightful commentary:

We have learnt nothing over the past week to alter our view on where interest rates are likely to go and what we think the best thing to do at the moment is for the average borrower. So if you read last week’s WO then you’ll gain nothing new this week. For those who did not read last week the guts of it is that if you are sitting floating waiting for the optimal time to fix – you missed it by three months!

But seriously, it is quite unlikely that fixed rates will decline from current levels so there is little point in hanging off if fixing is your goal. But there is not anywhere near the same need to act quickly as there was in March and over April because the strong NZ dollar is going to limit the extent to which wholesale interest rates rise in the near future. Personally I would fix three years though for many people floating is optimal because it is the only way to get an affordable debt servicing cash flow at the moment. If you are in that position – then frankly you may be taking on more debt than you can really afford.

Interest rates are below average at the moment and if you are floating you should be budgeting for 2% – 3% rate rises a couple of years from now. Run your numbers on that basis and see if you can truly afford the debt you are planning to take on.

As we noted last week, for business borrowers the dynamics are a bit different because there is a larger gap between low floating and highish fixed rates than for home owners. This different yield curve situation mainly reflects the fact that we NZ banks have traditionally competed for mortgage business using fixed rates.

Across the ditch the dynamics are different with competition mainly using floating rates. Don’t know why.

For business and farming borrowers there are strong cash flow advantages from floating. But be sure to budget for 2% – 3% rate rises two or so years from now. If you work out your debt servicing costs based on current low floating rates then you are setting yourself up for a major problem 2-3 years from now.

The Bank of New Zealand’s chief economist Tony Alexander is a respected commentator regarding all aspects of New Zealand’s economy. If you would like to subscribe to his informative weekly economic commentary click here.

Here is an extract of Tony’s 5 March 2009 comments on “if I were a house buyer what would I do?” –

The range of choice available to a potential buyer is very wide. Vendors are relatively motivated. Financing costs are lower than any sane person thought possible a year or even a few months ago – and further slight downside beckons. An old rule of thumb says that for any asset market you should not try to pick the top or the bottom. Always be prepared to sell when buyers abound and sacrifice the last portion of price gains. And be prepared to buy while range of choice is superb, holding back from trying to extract the last 5% – 10% from the purchase price.The big bugbear here of course is the prospect of a decent hike in New Zealand’s unemployment rate. Though lets be a bit more specific here. With population growth accelerating the unemployment rate is not going to be the most accurate labour market indicator to use when gauging pressures on the housing market. Over the past year while the unemployment rate has gone from 3.4% to 4.6% employment has continued to grow – by 1% or 21,000 people. We think employment numbers will decline, but percentage wise considerably less than the unemployment rate will rise.

What this means is you need to watch for yourself getting overly pessimistic about the housing market based on unemployment numbers when it is employment which actually matters.

If I felt there was a good chance I would get laid off in the coming year and I could only just meet a 20% deposit at the moment I would not buy a house because of the chance I could not continue to meet mortgage repayments. If however I felt the chances were good for continued employment then I would be out seriously looking at the moment. My view remains that the best buying opportunities in general in the current market will occur before the middle of this year.

The Bank of New Zealand’s chief economist Tony Alexander is a respected commentator regarding all aspects of New Zealand’s economy. If you would like to subscribe to his informative weekly economic commentary click here.

This week (Jan 20th 2009) Tony shared his view about the property market by putting himself in the shoes of a house-buyer:

I might have had a look at buying a property 12 or 24 months ago but found that the numbers simply did not stack up because the debt servicing cost was too high. But I would run the numbers again assuming a 5.5% five-year fixed interest rate and see what affordability of my preferred property would look like. The chances are that a very large number of people are going to find property extremely affordable this year and this is likely to add to demand and therefore limit the downside for prices.

The 5 year fixed 5.5% interest rate Tony talks about is a rate he predicts will occur before the end of 2009.

My personal opinion is that that rate should be” jumped on” when it occurs because I quietly suspect that 10% plus interest rates might be the norm from 2011 onwards. The great thing about a blog is that you and I will be able to re-visit this post to see if I was right or wrong!